PANKAJ DIAMONDS, vs. DEPUTY COMMISSIONER OF INCOME TAX,

C/SCA/22604/2017 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 22604 of 2017 =============================================================== PANKAJ DIAMONDS, Versus DEPUTY COMMISSIONER OF INCOME TAX, =============================================================== Appearance: MR TUSHAR HEMANI WITH MS VAIBHAVI K PARIKH for the PETITIONER(s) No. 1 DS AFF.NOT FILED (N) for the RESPONDENT(s) No. 1 MRS KALPANAK RAVAL for the RESPONDENT(s) No. 1 NOTICE SERVED BY DS for the RESPONDENT(s) No. 1 =============================================================== CORAM:HONOURABLE MR. JUSTICE AKIL KURESHI and HONOURABLE MR. JUSTICE B.N. KARIA

Date : 05/03/2018

ORAL ORDER

(PER : HONOURABLE MR. JUSTICE AKIL KURESHI) 1. The petitioner has challenged a Notice dated 31.03.2017 issued by the respondent-Assessing Officer to re-open the petitioner's assessment for the Assessment Year 2010-2011. 2. The brief facts are as under; The petitioner is a partnership firm and is engaged in the business of import and purchase of rough diamonds as well as of export of polished diamonds. For the Assessment Year 2010-2011, the petitioner had filed the Return of Income on Page 1 of 6

C/SCA/22604/2017 ORDER 11.10.2010 declaring total loss of Rs.31.85 Crores (rounded off). The Return was taken in scrutiny by the Assessing Officer, who passed the order of assessment u/s.143(3) of the Income-Tax Act, 1961 (“the Act”, for short). On 25.03.2013 the assessee met with loss of Rs.19.63 Crores (rounded off). To re-open such assessment, the Assessing Officer had recorded the following reasons; “The assessee firm filed its return of income for A.Y. 2010-11 declaring total loss at (-) Rs.31,85,70,796/- on 11.10.2010. Assessment was completed u/s.143(3) of the IT Act by reducing return loss at (-) Rs.19,69,77,640/- on 25.03.2014 which is sustained by the CIT(A) vide his order dated 02.03.2015. As per the information received from Dy. DDCIT (Inv.) Unit-6(1), Mumbai, the assessee firm obtained loan in 2008 from Antwerp Diamond Bank, Mumbai to import rough diamonds which they polished and shipped to Dubai to their counterparty and buyer-AL Mashreq Jewels LLC. As per their business practice, the goods were returned by buyer / counterparty to one of the supplier’s representative in Dubai being unsuitable for their use. When the assessee failed to pay the loan amount by the due date and was reminded several times, it become clear that suspicious activity was involved whereby the assessee was trying to extricate by denying. The buyer Al Mashreq Jewels LLC wrote to the bank about the returned diamonds which means assessee sold the diamonds to some other Page 2 of 6

C/SCA/22604/2017 ORDER alternative buyer as assessee claimed the goods were not returned, however, assessee did not make payment to the bank which money was borrowed by the assessee. Thus, it is the case of cessation of liabilities as assessee has not repaid the loan taken from Antwerp Diamond Bank. In view of the above, assessee has not furnished truly and full materials. I have reason to believe that the income chargeable to tax amounting to Rs.22,18,02,878/- has escaped assessment within the meaning of section 147 of the Act. Therefore, it is fit case for issue of notice u/s.148 of the I.T. Act, 1961.” 3. The petitioner raised objections to the Notice of re-opening under a communication dated 30.05.2017. Such objections were, however, rejected by the Assessing Officer by an order dated 24.11.2017. Hénce, this petition. 4. Perusal of the reasons recorded by the Assessing Officer would show that the assessee had taken a loan from one Antwerp Diamond Bank, Mumbai (hereinafter to be referred to as “the Bank”) in the year 2008. This was in order to import rough diamonds for re-export to a Dubai based buyer Al Mashreq Jewels (hereinafter to be referred to as “the buyer”) after polishing the diamonds. 5. According to the Assessing Officer, the goods Page 3 of 6

C/SCA/22604/2017 ORDER were returned by the buyer, as being found unsuitable for their use. The assessee had failed to repay the loan to the Bank within the due date. The buyer had also written to the Bank about the return of the diamonds, which, according to the Assessing Officer, would show that the diamonds were sold to some other buyer. In any case, the assessee did not repay to the Bank its loan and there was, thus, a cessation of the assessee’s liability. According to the Assessing Officer, therefore, the amount of loan of Rs.22.18 Crores (rounded off) from the Bank to the assessee was the income of the assessee, which had escaped assessment. 6. Counsel for the petitioner submitted that the Assessing Officer had recorded unsustainable reasons. Firstly, there was non-application of mind on his part since the assessee’s transaction with the buyer at Dubai was not worth Rs.22.18 Crores, as mentioned by the Assessing Officer in the reasons but, was Rs.3.72 Crores (rounded Off). Further, the assessee had subsequently repaid such amount to the Bank. This aspect was brought to the notice of the Assessing Officer in the objections raised by the assessee. Lastly, under no circumstances, there was a cessation of assessee’s liability. Even, assuming that the assessee’s buyer was not satisfied with the goods Page 4 of 6

C/SCA/22604/2017 ORDER and therefore, rejected the consignment, under no circumstances, the assessee’s liability to repay the loan taken from the Bank would cease. 7. On the other hand, learned counsel for the Revenue opposed the petition. He stuck to the reasons recorded by the Assessing Officer and the order rejecting the objections. 8. For multiple reasons, the Notice cannot be sustained. Firstly, present is a case where the impugned Notice has been issued to re-open the assessment beyond a period of four years from the end of relevant Assessment Year. The reasons recorded by the Assessing Officer nowhere demonstrate any failure on the part of the assessee to disclose material facts truly and fully. More importantly and interestingly, the Assessing Officer has completely failed to justify his belief that income chargeable to tax has escaped assessment. First and foremost, the total loan of Rs.22.18 Crores from the Bank to the assessee did not represent the transaction in question, the value of which was Rs.3.72 Crores. Further, the Assessing Officer also ignored the assessee’s plea that such amount was actually repaid to the Bank in subsequent year. Lastly, from the reasons, it cannot be gathered as to how the assessee’s liability had ceased. Even if the Page 5 of 6

C/SCA/22604/2017 ORDER Dubai based buyer of the petitioner firm was dissatisfied with the polished diamonds and therefore, rejected the consignment, at best, it would be a case where the security of the buyer / debtor would not survive. This can, under no circumstances, mean that the assessee’s liability to repay the laon to the Bank ceased. The Assessing Officer’s presumption that this was a case of cessation of liability, therefore, was baseless. Mere fact that the loan was not repaid during the validity period or for some time thereafter, is, as is well settled, not conclusive of the cessation of liability. For these reasons, the impugned Notice is set aside. The petition is allowed and stand disposed of accordingly.

(AKIL KURESHI, J.) (B.N. KARIA, J.) PRAVIN/* Page 6 of 6 Original copy of this order has been signed by the Hon'ble Judges. Digitally signed by: PRAVIN KARUNAN(HC00181), Principal Pvt. Secretary, at High Court of Gujarat on 04/08/2026 17:09:39